Bargaining with incomplete information: Evolutionary stability in finite populations

Abstract

This paper considers evolutionarily stable strategies (ESS) in a take-it-or-leave-it offer bargaining game with incomplete information. We find responders reject offers which yield a higher positive material payoff than their outside option. Proposers, in turn, may make more attractive offers than in the perfect Bayesian equilibrium. Efficiency-enhancing trade can break down even when the responder has no private information. Overall, the probability of trade and ex post efficiency are lower in the ESS than in the corresponding perfect Bayesian equilibrium. The results are observationally equivalent to behavioral explanations such as in-group favoritism and a preference for punishing selfish proposers but are driven by concerns about evolutionary fitness in finite populations.